What Is a Home Equity Line of Credit?

A home equity line of credit, or HELOC, is a loan taken out that uses a person's home equity as collateral. Contrary to a traditional loan where funds are disbursed all at once, a HELOC has a draw period during which funds can be accessed as needed, up to a set limit. In addition to only having to pay for the funds that have been used, HELOCs often allow borrowers to pay interest only initially, according to MyFICO.

The interest a person pays on a HELOC is often tax-deductible, according to MyFICO. Additionally, these loans are often granted with a variable interest rate, which means monthly payments may fluctuate over time. HELOCs are an alternative to home equity loans or cash-out refinances. These are also types of home-backed financing, however, they are ones in which the funds are distributed in one lump sum, which often results in higher costs to the borrower.